Wednesday, 2 November 2016

The state of play in mergers

I've finally got round to wrapping up another of the sessions at last week's RBB Economics conference in Sydney - "Issues in merger control". Three down, one to go (the session on the outlook for Aussie competition law after the Harper review changes).

Carolyn Oddie, a partner at Allens, led off with "Recent developments in merger decisions". She had three issues. One was (she argued) a tendency for the ACCC to define over-narrow or over-segmented markets: one example (in a media merger) was "readers from an older demographic with a preference for newspapers". Another was whether the ACCC was getting the balance right when it looked at the influence of non-controlling minority shareholders, which has cropped up a fair bit (she instanced three decisions in the past year). She didn't conclude that the ACCC was necessarily wrong in how it approached them - it wasn't been overly blasé or overly alarmist about risks to competition - but rather that the whole topic needed a good shakedown, especially as jurisdictions overseas appeared to be going in different directions. The EC is increasingly relaxed about minority stakes, whereas the US is increasingly concerned: one issue in the States that has got a bit of attention recently is whether fund managers, each with (say) small stakes across a range of airlines, have a collective interest in, and influence on, their companies competing less hard against each other.

And her final issue - which was something of a recurrent theme throughout the conference - is how the ACCC handles dynamic industries with fast-moving technical change. Her conclusion was that the ACCC's media merger guidelines attribute a "very high bar before new technology will be considered a legitimate [competitive] constraint", that the approach is "arguably too conservative in modern industries", and that businesses are effectively forced to decline, after new technology hits, before any consolidation response is allowed the green light. I can imagine there's vigorous debate on exactly these same issues inside our Commerce Commission at the moment, given that it's got both NZME / Fairfax and Vodafone / Sky TV on its plate.

Next up was Simon Muys, a partner at Gilbert + Tobin, with "Comments on the ACCC's draft media merger guidelines" (you can find the guidelines themselves here). And again we're in the "new era economy" that China's regulator spoke about in his keynote address. Muys felt that the media merger guidelines were an opportunity missed to come to terms with this new world: even the term "media" may be obsolescing. He pointed out that if you looked back at some of the decisions - such as the mergers of bricks and mortar video shops (Video Ezy / Blockbuster in 2007) or linear TV broadcasters (Foxtel / Austar in 2012) - they now look distinctly archaic things to be worried about, given the way internet-distributed services like subscription video on demand have boomed since.

He said that a better way forward would have been to be more elastic about the idea of "media"; to accept the reality of monopolistic competition; to look on network effects as more likely to be positive for consumers rather than inherently negative; to focus on innovation and dynamic efficiency rather than on the traditional static 'SNIP' test for increased prices in the short-run; to realise that substitutability isn't the binary thing it might once have been, given that consumers do things like "multihome"; and to be more ready to accept inter-platform competition rather than inter-company competition as an acceptable outcome. All of which, he said, should lead to the policy conclusion that a competition agency ought to err on the side of non-intervention, and might even have a positive duty not to. If it did, it should focus on any risks of foreclosure - an apt comment, as just a few days later our Commerce Commission issued its 'Letter of Unresolved Issues' with the Vodafone / Sky merger, with foreclosure being one of them (see para 39 of the letter, for example).

And then we had Simon Bishop, one of the founding partners of RBB Economics, on "Economics and the Courts: constraining the discretion of competition authorities", which was about merger developments in the European Union. He was not impressed with how things have been going at the European Commission: his view was that it was now being overanxious about mergers it should be letting through, and that 4-to-3 mergers, for example, were now being challenged where previously they would have found it easier to get the nod.

He picked out two reasons why (in his view) they have been going awry. One was an over-mechanical reliance on Cournot or Nash / Bertrand modelling, which by inherent design will always spit out the conclusion that mergers lead to higher prices, and - again one of the recurrent themes of the conference - agencies ought to look more at the facts of how firms actually compete, especially dynamically, rather than trying to shoehorn them into assumed patterns of behaviour. The other thing that's gone off the rails, he felt, is progressively poorer internal quality assurance. The EC brought in a chief economist office to provide greater internal peer security after court reversals in the early 2000s, but Bishop argued that it wasn't operating properly anymore, had got too close to the core investigation teams, and was essentially reduced to "marking its own homework". Hence the otherwise rather mysterious title of his presentation: the EC's own internal scrutiny processes have been falling down, and the courts are having to step in as the watchdog.

Another excellent session. It's certainly not getting any easier for merger clearance authorities: they don't want to be hung up on yesterday's problems, which may be overturned tomorrow by the next technological advance, but they don't want to be suckers for any old argument about supposedly transformative new entry that magicks away competition issues, either. And even if they do sign up for "tech has changed things" to some greater or lesser degree, that can create new conundrums of its own. For example, if an agency does buy into the "new era" view, it's likely to look harder at incumbents buying out innovative start-ups. But if it does (as one commenter said from the floor) it could reduce the incentives for start-ups in the first place, as often their intended endgame is to sell themselves to the Googles or the Facebooks.

No easy answers to any of this, then, though one implication did come through loud and clear - all of us in the competition game (economists, lawyers, regulators) need to build some stronger standing capacity to read the direction of modern technologies.

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